Proper preparation can cut your audit costs
- July 10, 2019
- Posted by: Hood & Strong
- Category: Uncategorized
Outside financial audits may seem like an extravagance to nonprofits working to contain costs and focus on their mission. But undergoing regular audits allows organizations to identify risks early and act quickly to prevent problems. Independent audits also provide valuable reassurance to donors and other stakeholders that your ship is on course.
Fortunately, you can reduce the cost of external audits by preparing properly. Here are some suggestions.
Draw the initial road map
Part of effective audit preparation happens before the audit is even scheduled — the drafting of a request for proposals (RFP) from prospective auditors. The RFP should describe your organization, its programs, major funding sources and the type of service you need. Once selected, the audit firm will provide an engagement letter outlining the scope of the audit services to be performed and assigning responsibility for various tasks to staff or auditors.
The preaudit meeting with your auditors comes next. Finance staff and management should attend, as well as representatives from your board of directors or audit committee. Those involved will draw up a timeline for the work, and the auditors can answer any questions about the information they’ll need. This also is a good time to ask auditors about their preferred format for documentation (for example, print copy or digital, PDF or Excel file).
You should use the preaudit meeting to inform the auditors of any changes in your organization’s activities since you first met. Let them know in advance of new or eliminated programs, new grant reporting requirements, and changes to internal controls and staff. This heads-up lets them plan accordingly.
Collecting and organizing the documentation the auditors need before they arrive saves them time and you money. Usually the auditors will provide you a list of information to provide and the date when each item is needed. Of course, keeping accurate, complete and up-to-date accounting-financial records throughout the year will make this key step much easier.
You’ll also benefit from staying abreast of changes to the Financial Accounting Standards Board’s rules for nonprofits. By implementing new accounting standards on a timely basis, you won’t have to backtrack to make adjustments during the audit.
In addition to the organization’s year-end financial statements, the auditors will want to see accounting-related records, including:
- Journals and ledgers,
- Bank statements and canceled checks,
- Payroll for employees and other tax records,
- Accounts payable and receivable schedules and records,
- Depreciation schedules,
- Expense account records,
- Physical inventories,
- Fixed asset schedules, and
- Investment-related documents.
Auditors also need relevant organizational records such as articles of incorporation; financial policies; exemption letters; board meeting minutes; grant agreements, pledges and other funding documents; contracts; leases; and insurance policies. They usually appreciate having a current organizational chart, too.
You should gather support for the footnote disclosures, as well. This includes documentation of significant estimates, pending litigation, restricted contributions and related-party transactions.
The good news is that, while the necessary documentation often is extensive, it won’t change much from year to year. That’s unless there are major changes in your organization’s circumstances. Using audit schedules for your monthly accounting can better prepare you for next year’s audit.
Do a preliminary analysis
Don’t wait for the auditors to find problems and ask questions. You can expedite the audit and reduce costs when you identify and address issues before they’re even raised by auditors.
After you make your year-end closing entries, reconcile all your schedules and workpapers to the trial balance and review for obvious anomalies. Double-check manual journal entries, accrual calculations, entries that require estimates, and in-kind donation valuations. Compare actual figures with budgeted ones and be ready to explain any significant variances.
A different perspective
Annual independent audits needn’t be stressful experiences. Organizations that devote proper time and attention to their accounting throughout the year can find audits affirming — and a source of suggested improvements that help ensure long-term viability.